The Public Company Accounting Oversight Board has been making changes to its strategic plans and agenda in response to the COVID-19 pandemic as it sees auditors doing more work remotely and facing issues with auditing financial statements issued during the pandemic.
“We have a five-year strategic plan. We’re in the middle of it, and our effort is to make the PCAOB a more proactive, more relevant, more innovative, more collaborative organization,” said PCAOB board member Duane DesParte during Financial Executives International’s Corporate Financial Reporting Insights Virtual Conference on Monday. “There are four priorities that, in my mind, are clearly important and guiding our activity. We want to put more focus on how we can keep driving better audit quality. One of the things we’re emphasizing and thinking about is how we can focus on prevention of audit deficiencies in addition to inspecting audit deficiencies. For instance, we’re striving to provide more relevant, timely, and easier to understand information and insights. We’re striving to be more proactive in our engagement with all of our stakeholders. We’re going to continually monitor, as we always have, issues and trends in the financial reporting ecosystem, as well as look at findings and observations in our program. We’ll continue to adapt our agenda as appropriate.”
The pandemic has forced the board to reassess some of those priorities, as more firms have been relying on remote audits instead of traveling to their clients’ offices.
“Certainly for all of us, the pandemic is uncharted territory,” said DesParte. “Our focus, of course, has been on firms maintaining high-quality auditing in this unique environment. We’ve put out a few published documents to emphasize that, despite the economic uncertainties, despite the operational complexities that both issuers and auditors may be facing, that it’s important auditors stay focused and comply fully with our auditing standards. Objectivity and professional skepticism in this environment are really key.”
The PCAOB has signaled that audits may take more effort and require more time than in the past. “It’s important that management, audit committees and auditors work together to make sure that everybody has the right amount of time to get their work done effectively, and that includes the audit,” said DesParte. “The auditor sometimes can be jammed at the end of the process, and everybody needs to be aware that they’re going to need to take whatever time they need to take to get it done correctly. We’ve also been emphasizing that auditors need to give a bit of attention to risk assessment. Management should be reassessing risk as well, of course.”
The PCAOB has been highlighting issues such as changes in materiality, in addition to cybersecurity and fraud risks. “As business changes in certain companies, [and there are] changes in company processes and controls, including IT controls, perhaps new cyber risks need to be considered,” said DesParte. “The potential for heightened fraud is something else that needs to be considered. Economic pressures add a potential incentive for fraud. The changes in operations and controls add potential opportunity for fraud, so that has to be thought about in new ways. Obviously there are new risks in the financial statements. Testing may need to be adjusted. Fair valuation, reserves, impairments, going concern assessments — all of that is important.”
Auditors should also be talking more frequently with audit committees and management and in more detail than in the past, so everybody understands the changes taking place. “Audit execution is going to be a really high-difficulty dive this year, particularly at the end of the year,” said DesParte. “For last year’s audit, many audits were already done by the time the pandemic emerged. For [this year], it’s going to be a real peak as it always is at year end, but it’s going to be in this very unique environment, so it’s going to be a challenge.”
Internal change
The PCAOB itself has changed the way it operates as a result of the pandemic. “We transitioned to remote work in mid-March,” said DesParte. “We are conducting our core activities remotely with very minimal disruption. From an inspection standpoint, we are 100 percent remote there.”
The PCAOB’s inspections have been changing in other ways too. “In the 2020 inspections, for the first time we’ve included a sampling of June 30, 2020, year-end audits,” said DesParte. “Usually they would not be looked at until the next cycle in 2021. We usually cut off at March 31, but given that June 30 was where the pandemic was maybe most starting to come into play at year end — March 31, of course, too — we wanted to get in early to start to see what issues might the auditors be facing, what preparers might be facing, and we’re also looking at work the auditors might be doing on an interim quarterly review basis. We’ve not done that in the past. The objective is not to play gotcha. The objective is to help us better understand earlier what are some of the issues so that we can get guidance out if we need to help people as they move toward the year end here.”
He added that the PCAOB would be releasing a “spotlight” paper in the next week or two providing some observations and highlighting points of focus for the auditors and for audit committees.
A report from the trenches
Ian Wildenborg, an audit partner at KPMG who spoke during the same session, has been seeing similar trends at his firm. “The focus and priority broadly continues to be audit quality,” he said. “That probably doesn’t sound like a significant shift from what many companies have been hearing from their auditors for years now, but there are components and tangential elements of that. This environment that we find ourselves in creates some complexities, so that priority of quality doesn’t take away from the fact that we’re working really differently with companies and clients today than we were nine months ago.”
Working in the remote environment has required KPMG to change the way it interacts with its audit clients. “It’s really how do we create that connection with company personnel and how do we enhance that coordination through electronic means now in a remote environment with our work activities and the work activities of the company and really staying closely connected as you move through any part of the financial reporting process, whether it’s quarter-end close or year-end close, or those periods in between where things might be a little bit lighter,” said Wildenborg. “That connectivity with the company and with the auditor, I think, is really a critical priority that I think a lot of us in the profession continue to focus on. We’re spending more time assessing changes to a company’s financial reporting process, evaluating the impact and underlying accounting determinations of the pandemic, and certainly as it relates to internal controls with all that change, or the potential for change, understanding more processes have evolved or controls have changed. Or maybe where they haven’t changed and potentially should have.”
The PCAOB has also been dealing with the growing calls for diversity this year amid the Black Lives Matter protests, which have prompted the leaders at many audit firms to make commitments to greater diversity in their ranks. DesParte acknowledged that diversity has long been a challenge for the profession.
“One strategy that we are seeing at companies is to engage with potential future auditors earlier in their schooling, engaging with students while they’re still in high school to foster awareness and interest in the profession,” he said. “In my former life as a controller [at energy company Exelon], we had partnerships with [the National Association of Black Accountants], which is a great organization, in each of our major geographies. Another thing we did was we had a summer internship program for high school students from disadvantaged neighborhoods that we thought would be helpful.”
He pointed out that the PCAOB has an annual scholarship program where it awards scholarships of $10,000 each to students, and it has been encouraging universities with accounting and auditing programs to target students from historically underrepresented groups in the profession. This year, 25 of the 234 scholarship awards went to students who were transferring to universities from community colleges. Forty percent of the scholarship recipients this year were nonwhite, and half of them had household incomes below $40,000, and 67 percent were needs-based aid recipients.
The board’s agenda
During a press conference following the session, DesParte was asked by Accounting Today for his reaction to a statement issued last month by a fellow board member, J. Robert Brown, who criticized recent moves by the PCAOB to strip down its research and standard-setting agendas without proper consultation with all the board members (see story). DesParte defended the agenda changes.
“The objective of updating it was to hone in on and really focus the public’s attention on those projects where we expect to have activity or action within the next 12 to 18 months,” said DesParte. “I believe that the projects that are on the agenda are really important. For instance, the [quality control] project, I think that is an important project in driving improvements in audit quality, and I think that all the projects that are on the agenda are likewise going to help drive improvements in audit quality to the benefit of investors, which of course is our primary mission.”
He believes that projects related to technology, data and audit evidence will also help keep the PCAOB focused on where audits can be more effective going forward. “In my mind, I think the agenda is in a good place,” said DesParte. “When you think about the five of us, I’m not sure that I would expect all five of us are always going to agree on every issue that comes up. The SEC deliberately established the new board in 2018 with each of us having different backgrounds, different perspectives, different experiences, and I know I really personally benefit and I think the whole board benefits from that diversity in having a robust sharing of different views and different perspectives. I meet regularly with Jay and each of the other board members. We share perspectives and I find that very helpful in my own deliberations, so I think we’re in a good place from my vantage point.”
Brown also criticized the PCAOB’s proposal in a concept release last December to use a quality control standard from the International Auditing and Assurance Standards Board, International Standard on Quality Management 1, as the starting point for its own quality control standard. DesParte was asked to respond to that criticism as well.
“The concept release did ask for feedback on the proposal to use the ISQM 1 standard of the IAASB as the starting point, and that framework is a kind of integrated risk-based framework,” he said. “It’s scalable. I think that it’s similar to COSO here in the U.S. for internal controls over financial reporting, so I think that a lot of people are used to that kind of a framework. But the point is that we have gotten a lot of comments back from responders to our concept release with views about whether that is the right way to go or not the right way to go. If you go through the comment letters, I think generally there is support for using ISQM 1 as a starting point. That doesn’t mean there aren’t certain provisions that perhaps we’ve gotten feedback that maybe should be tweaked here and there to suit our needs. But I think generally commenters were supportive of that direction.”